It is frightening isn't it. Then I think about Treasury's plan to lower yields by exempting US banks' Treasuries holdings from Supplementary Leverage Ratio requirements. In short, banks can 'safely' buy as many treasuries as they want without worrying about the amount of Tier 1 capital.
That’s great isn’t it? US banks will now buy so much treasuries that will bring lower yields, exactly what the US government wants. Exactly what America needs because god knows they're not going to survive the current interest rates. Not American households, not American corporations and most certainly not the US government.
But wait a minute….
These safeguards were put in place after the GFC to prevent a repeat of bank failures that threatened to bring down the financial system.Come Covid, and they temporarily suspend the safeguard.
Now under some stress again, and stress nowhere near as ‘immediately desperate' as Covid and they want to remove the safeguard altogether?
See a pattern there?
A pattern that describes America, and more broadly the West’s attitude towards spending.Do anything and everything to keep the party going when they have long lost the financial capacity to pay for it with what they earn.
The party needs to end and they have take the hardship they have put off for almost two decades. They have to spend a lot less money, raise a lot more money and start balancing their budgets. This will come with more hardship than most of their citizens have had to face for almost 20 years now. Detox as the ever disingenuous Scott Bessent likes to put it.
But instead of doing this, America, especially Bessent thinks it/he cleverly has ‘all sorts of levers' to pull to keep yields down.
But the rest of the world, starting with the GFC is increasingly clued up to how unreliable the US now is as a borrower. It will always take the easy way out instead of paying its debt responsibly.
Last week’s bond ructions are only the beginning. All levers they claim to have are desperate measures of a borrower whose credit line is close to getting terminated by its lenders.
Meantime Scott Bessent to Tucker Carlson:
“If you take a bank loan, the bank is in charge, they can repossess whatever you borrowed against. But if you take a big enough loan, you’re kind of in charge of the bank,”
Even accounting for the (brain dead) audience he is playing to, he seems to clearly believe that America is still in charge of the interest it gets to pay on its borrowing. Even a truly strong America under Bill Clinton gave the bond market the respect it deserves.
Today's America should be very afraid of it, but isn't. Regardless of how many half truths Bessent or Powell tell about last week's movement in USD and bond yields, it was the evidence the world needed, in the same way Deepseek was evidence of the false promise of unshakeable American AI dominance or supremacy.
I'm betting there's only one way long end US yields move from here. A lever gets pulled, yield goes down. Then very soon the opportunity to get out at a higher price presents itself and treasury holders flood the market trying to get out of being a US debtor. And yields go up again. Until the implosion comes.
The dire US fiscal situation was a problem for the next generation ten years ago, it was a problem for the next decade 5 years ago. Today it is a problem for yesterday which America still refuses to address by cutting social security benefits, medicare, medicaid and slashing military expenditure by half.
Sharks have smelt the blood in the US treasuries market. The sheer size of the US treasuries market may no longer be enough to protect it from a Black Wednesday. The implications for the world when that happens? Unthinkable. That's exactly what Gold is telling us.
I'm still comfortable with betting against America with every tool possible, and gold is probably the safest way of doing so.
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